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Bank of Canada Interest Rate Announcement: July 19, 2011

The Bank of Canada has once again announced that the key interest rate will remain unchanged at 1 per cent. This means if you’re a variable mortgage holder you can breathe a sigh of relief, as the prime lending rate is also unchanged.

On the one hand, Canada is in the financial position to increase rates due to growing employment, a robust housing market and a relatively stable economy. However, Canada cannot afford to raise rates now as it would cause the Canadian dollar value to increase, affecting an already suffering export business [1]. The looming US recession and the European debt crisis are currently the major issues that need to be addressed.

By keeping the rate constant, inflation does become a concern in the near future. Low rates promote more borrowing by Canadians and consumer spending is usually kept in check by increasing interest rates.

Mark Carney and his team are obviously willing to run the risk of inflation in order to protect the current Canadian economy from those of the United States and Europe [2].

“The arguments are there for the Bank of Canada to start hiking rates next week, but we increasingly think that this fall might even be too early given the problems we are seeing in the global economy.” — Jimmie Jean, Desjardins Capital Markets. (Source: CBC News)

This is the ninth month that the overnight rate has stood at 1.00% and a rate change is not expected until later this year or possibly early 2012 [3].

So, how does this affect your mortgage?

Variable mortgage rates will remain unchanged at the current low levels, but be mindful that this is not sustainable forever. This remains an atypical low interest rate environment. It is a good idea to budget for rate increases, or even better, benchmark your payments to a higher rate, like a 5-year fixed.

In the long term, inflation could affect mortgage rates. Fixed mortgage rates follow Government of Canada bond yields of the same term length. Inflation negatively affects bonds as their “real” value decreases and erodes the value of future bond payments. So, in an economic situation with high inflation, bond prices fall which means their yields increase (there is an inverse relationship between a bond`s price and its yield)[4]. Consequently, fixed rates also rise.